Franking credits and your SMSF
You may have noticed significant media coverage recently regarding the Australian Labor Party’s proposed policy to stop SMSFs from receiving tax refunds for the franking credits they receive in conjunction with the dividends paid from Australian companies they own.
First of all, what are franking credits and how do they benefit SMSFs?
Under the Australian tax system companies pay 30 per cent tax on their profits. When these profits are then passed on to their shareholders in the form of dividends, the company also hands the shareholders a credit for the tax the company has already paid (the “franking credit”).
The individual shareholder then pays tax on the profit they received from the company less the credit for the tax the company has already paid.
The franking credit ensures that the company profits are taxed at a shareholder’s marginal tax rate.
For SMSFs in retirement phase which generally have a zero tax rate, this means they can receive a full refund of the tax already paid by the company on their behalf.
SMSFs who have members in accumulation phase benefit from franking credits reducing the tax they pay on their SMSF’s earnings and may receive partial refunds of their franking credits depending on the fund’s overall tax liability.
Labor, if elected, will change the law so that SMSFs and other low tax paying entities will no longer be able receive a tax refund for the franking credits they receive. This will affect all SMSFs that own Australian shares, especially funds that have received tax refunds in recent years.
This could have a significant impact on the retirement income of many SMSF members in retirement. For example, an SMSF with $500,000 in retirement phase with 40 per cent of assets held in Australian shares could lose around $4,285 per year in tax refunds from their franking credits. This impact could be a significant hit to your annual retirement income.
How can we help?
SMSF Specialist advisors can help you understand how a change in the tax treatment of franking credits may impact your SMSF portfolio and retirement income. Please feel free to give one of our SMSF Specialist advisors a call if you have any questions on this issue.
Cayle Petritsch
SMSF Specialist Advisor
T: 02 9984 7774
Martin van der Saag
Director
T: 02 9984 7774
“Franking credits can significantly enhance after-tax returns for SMSFs when structured correctly.”
About the author
Cayle Petritsch - Director & Wealth Advisor
Cayle Petritsch, Director and Wealth Advisor, works with our existing clients who have recognised the importance of business owners making strategic financial choices not only for their company, but for their personal finances too.
Cayle saw a great opportunity to expand North Advisory’s services into SMSF/superannuation, personal wealth management, asset protection services and other crucial personal finance facets that business owners need to consider.
His approach to wealth management allows you to receive highly personalised wealth advice. Working closely with Marius, Cayle understands the unique needs of every client, from their lifestyle and business goals to their retirement plans.
Key Takeaways
Franking Credits Improve After-Tax Returns
They can significantly boost income within an SMSF, particularly in low-tax or pension phase.
SMSFs Are Well-Placed to Benefit
Due to lower tax rates, SMSFs often gain greater value from franking credits than individuals on higher marginal tax rates.
Investment Balance Still Matters
While attractive, franking credits should complement a diversified investment strategy.
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Frequently Asked Questions
What are franking credits?
Franking credits represent tax already paid by Australian companies on profits distributed as dividends, which can be used to offset tax within an SMSF.
How do franking credits benefit an SMSF?
SMSFs may use franking credits to reduce tax payable on investment income, and in some cases receive a refund if credits exceed the fund’s tax liability.
Are franking credits available in both accumulation and pension phase?
Yes. Franking credits apply in both phases, though refunds are often more valuable in pension phase where tax rates may be nil.
Do all shares provide franking credits?
No. Only Australian shares that pay fully or partially franked dividends provide franking credits.
Should franking credits drive my SMSF investment strategy?
Franking credits should be considered as part of a broader strategy, not the sole reason for investing in a particular asset.
If my SMSF is in pension phase, can franking credits really be refunded back to the fund?
Yes. If your SMSF is in retirement (pension) phase and paying 0% tax, franking credits may be refundable because the tax has already been paid at the company level.
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